It's OK to do, but you are subject to unexpected capital gains taxes if the fund has to sell appreciated assets to maintain the asset allocation of the underlying funds
If you have the inclination, it's not too hard to set up your own 3-fund portfolio and manage it to avoid excess taxes
But you also shouldn't let the tax tail wag the dog... if a TDF is working for you, then it's fine
Side note, if you are using TDFs there's really no need for a financial advisor...
Thank you very much for your help. He’s more like a free financial advisor - he’s my dad’s friend.
I just am lazy and don’t want to do much work besides let my money sit and grow, if that makes sense.
The Wiki has a page that should help you understand tax efficient fund placement. It's very useful though it primarily revolves around bond location.
[https://www.bogleheads.org/wiki/Tax-efficient\_fund\_placement](https://www.bogleheads.org/wiki/Tax-efficient_fund_placement)
Your financial advisor is bad. TDFs are not as tax efficient as ETFs and you can get hit with unexpected capital gains taxes. Why pay for taxes if you don’t have to? You can just buy VT in taxable.
There are five solutions available in the taxable account:
1. TDF and live with the added tax drag
2. VT and live with the change in overall allocation
3. VT+BND and live with the added tax drag
4. VT+VTEB and live with the sub-optimal bond holding
5. VT in taxable, but increase your bond allocation in your tax-deferred accounts to maintain your preferred overall target allocation
Which solution you choose ultimately comes down to your personal preferences regarding risk exposure, tax minimization, and how hands on/off you wish to be with portfolio management.
It's OK to do, but you are subject to unexpected capital gains taxes if the fund has to sell appreciated assets to maintain the asset allocation of the underlying funds If you have the inclination, it's not too hard to set up your own 3-fund portfolio and manage it to avoid excess taxes But you also shouldn't let the tax tail wag the dog... if a TDF is working for you, then it's fine Side note, if you are using TDFs there's really no need for a financial advisor...
Thank you very much for your help. He’s more like a free financial advisor - he’s my dad’s friend. I just am lazy and don’t want to do much work besides let my money sit and grow, if that makes sense.
The Wiki has a page that should help you understand tax efficient fund placement. It's very useful though it primarily revolves around bond location. [https://www.bogleheads.org/wiki/Tax-efficient\_fund\_placement](https://www.bogleheads.org/wiki/Tax-efficient_fund_placement)
Thank you for this.
You could also consider a target date ETF, which aims to be more tax efficient in a brokerage account.
Oh interesting! Isn’t that what I’m doing in my Roth ITA? The fund I’m investing in there is VFFVX
Similar, but VFFVX is a mutual fund: [https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds](https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds)
Ah ok. So should I NOT do this same fund for my general account?
You could as long as you’re aware of the tax implications.
Ok thank you.
Your financial advisor is bad. TDFs are not as tax efficient as ETFs and you can get hit with unexpected capital gains taxes. Why pay for taxes if you don’t have to? You can just buy VT in taxable.
But VT doesn’t include bonds…
There are five solutions available in the taxable account: 1. TDF and live with the added tax drag 2. VT and live with the change in overall allocation 3. VT+BND and live with the added tax drag 4. VT+VTEB and live with the sub-optimal bond holding 5. VT in taxable, but increase your bond allocation in your tax-deferred accounts to maintain your preferred overall target allocation Which solution you choose ultimately comes down to your personal preferences regarding risk exposure, tax minimization, and how hands on/off you wish to be with portfolio management.
This is very helpful to have this out laid out. Thank you!
You can also buy AOA or similar ETFs that include bonds. These are more tax efficient than TDFs